This week: Funding of IT (ch 9 in Pearlson/Saunders)

1. This week:Funding of IT (ch 9 in Pearlson/Saunders) John Krogstie, IDI

2. INTRODUCTION • This chapter looks at the financial side of IT. • First we explore ways of funding the IT department, • Then, we look at ways to calculate the cost of IT investments, including total cost of ownership and activity based costing. • Finally, we consider ways of monitoring IT investments after they are made.

3. FUNDING THE IT DEPARTMENT

4. Funding the IT department • How are costs associated with designing, developing, delivering and maintaining IT systems recovered? • There are three main funding methods: • Chargeback • Allocation • Corporate budget

5. Chargeback • IT costs are recovered by charging individuals, departments, or business units • Rates for usage are calculated based on the actual cost to the IT group to run the system and billed out on a regular basis • They are popular because they are viewed as the most equitable way to recover IT costs • However, creating and managing a chargeback system is a costly endeavor • In Norway around 20 % use chargeback, more in large than in small organizations, more in USA

6. Allocation • Recovers costs based on something other than usage, such as revenues, log-in accounts, or number of employees • Its primary advantage is that it is simpler to implement and apply • There are two major problems: • The 'free rider' problem • Deciding the basis for charging out the costs

7. Corporate Budget • Here the costs fall to the corporate P&L, rather than levying charges on specific users or business units • In this case there is no requirement to calculate prices of the IT systems and hence no financial concern raised monthly by the business managers • However, there are drawbacks, as shown in the next slide

8. Figure 9.1 Comparison of IT funding methods

9. HOW MUCH DOES IT COST?

10. How much does IT cost? • The most basic method for calculating the cost of a system is to add up the costs of all the components including hardware, software, network, and the labor of the people involved • Many MIS organizations calculate the initial costs and ongoing maintenance costs in just this way

11. Activity Based Costing • Activity Based Costing (ABC)counts the actual activities that go into making a specific product or delivering a specific service. • Activities are processes, functions, or tasks that occur over time and have recognized results. They consume assigned resources to produce products and services. • Activities are useful in costing because they are thecommon denominator between business process improvement and information improvement across departments

12. Total Cost of Ownership (TCO) • TCO is fast becoming the industry standard • It looks beyond initial capital investments to include costs associated with technical support, administration, and training. • This technique estimates annual costs per user for each potential infrastructure choice; these costs are then totaled. • Careful estimates of TCO provide the best investment numbers to compare with financial return numbers when analyzing the net returns on various IT options

13. TCO Component Breakdown • For shared components like servers and printers, TCO estimates should be computed per component and then divided among all users who access them • For more complex situations, such as when only certain groups of users possess certain components, it is wise to segment the hardware analysis by platform • Soft costs, such as technical support, administration, and training are easier to estimate than they may first appear

14. TCO as a Management Tool • TCO also can help managers understand how infrastructure costs break down • It provides the fullest picture of where managers spend their money as TCO results can be evaluated over time against industry standards • Even without comparison data, the numbers that emerge from TCO studies assist in decisions about budgeting, resource allocation, and organizational structure

15. VALUING IT INVESTMENTS

16. Valuing IT Investments • Soft benefits, such as the ability to make future decisions, make it difficult to measure the payback of IT investment • First, IT can be a significant part of the annual budget, thus under close scrutiny. • Second, the systems themselves are complex, and calculating the costs is an art, not a science. • Third, because many IT investments are for infrastructure, the payback period is much longer than other types of capital investments. • Fourth, many times the payback cannot be calculated because the investment is a necessity rather than a choice, and there is no tangible payback

17. Figure 9.4 Valuation Methods

18. Pitfalls in Analyzing IT Investments • Not every decision calls for in-depth analysis. Some are easy to make. • Not every evaluation method works in every case • Circumstances may alter the way a particular valuation method is best employed • Managers can fall into “analysis paralysis” • Even when the numbers say a project is not worthwhile, the investment may be necessary to remain competitive

19. Monitoring IT Investments • Management's role is to insure that the money spent on IT results in benefits for the organization. • That means an agreed-upon set of metrics must be created, and those metrics must be monitored and communicated to senior management and customers of the IT department

20. The Balanced Scorecard • Focuses attention on the organization’s value drivers (which include, but are not limited to, financial performance) • Companies use it to assess the full impact of their corporate strategies on their customers and workforce, as well as their financial performance • This methodology allows managers to look at their business from four perspectives: customer, internal business, innovation/learning, and financial

22. The Balanced Scorecard applied to IT • Applying the categories of the balanced scorecard to IT might mean interpreting them more broadly than originally conceived • For example, for the MIS scorecard, the customer is a user within the company, not an external customer • The questions asked when using this methodology within the IT department are summarized in the next slide

23. Figure 9.7 Balanced Scorecard applied to IT departments

24. The IT Balanced Scorecard • A scorecard used within the IT department helps senior IS managers understand their organization’s performance, and measure it in a way that supports its business strategy • The IT scorecard is linked to the corporate scorecard, by insuring that the measures used by IT are those that support the corporate goals

25. IT Dashboards • IT dashboards summarize key metrics for senior managers in a manner that provides quick identification of the status of the organization • Dashboards provide frequently-updated information on areas of interest within the IT department. • The data tends to focus on project status or operational systems status • Problems can be identified and handled without waiting for the monthly CIO meeting